TIPS (Treasury Inflation-Protected Securities)
Quick Definition
U.S. Treasury bonds whose principal adjusts with inflation (CPI), protecting investors from the erosion of purchasing power.
Key Takeaways
- Principal adjusts with CPI inflation semiannually
- Coupon rate is fixed but applied to inflation-adjusted principal
- Deflation floor protects original principal at maturity
- TIPS-to-nominal spread reveals market inflation expectations (breakeven rate)
What Is TIPS (Treasury Inflation-Protected Securities)?
Treasury Inflation-Protected Securities (TIPS) are U.S. government bonds designed to protect investors from inflation. The principal value of TIPS adjusts semiannually based on changes in the Consumer Price Index (CPI). The fixed coupon rate is applied to the adjusted principal, so both the coupon payments and the final principal redemption increase with inflation. At maturity, investors receive the greater of the inflation-adjusted principal or the original face value (providing deflation protection). TIPS are issued in 5-, 10-, and 30-year maturities. The difference between nominal Treasury yields and TIPS yields of the same maturity is called the "breakeven inflation rate" — a key market-based measure of inflation expectations.
TIPS (Treasury Inflation-Protected Securities) Example
- 1A $1,000 TIPS with a 1.5% coupon after 3% inflation has an adjusted principal of $1,030 and pays $15.45 (1.5% × $1,030) semiannually
- 2The 10-year breakeven rate (nominal Treasury yield minus TIPS yield) of 2.3% implies the market expects 2.3% average annual inflation
Related Terms
Inflation-Protected Bond
A bond whose principal or coupon adjusts with inflation, preserving the investor's purchasing power regardless of price level changes.
I Bond (Series I Savings Bond)
A U.S. government savings bond with inflation protection, combining a fixed rate with a variable rate that adjusts every 6 months based on CPI.
Real Yield
The return on a bond after adjusting for inflation, representing the actual increase in purchasing power for the investor.
Treasury Bond (T-Bond)
A long-term U.S. government debt security with a maturity of 20 or 30 years, paying semiannual coupon interest.
Bond
A fixed-income debt security where investors loan money to an issuer in exchange for regular interest payments and return of principal at maturity.
Yield Curve
A graphical representation of interest rates across different maturities for bonds of similar credit quality, typically U.S. Treasuries.
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